7. Eligibility of the Net Proceeds from the Sale of the Main Office for Reinvestment Pursuant to § 790
The Application states that although SJWC continues to operate out of the facility, the Main Office has reached the end of its useful life. Thus, because SJWC believes its Main Office facility is no longer useful, it filed the Application, in part, to request that the Commission make the determination that the Main Office facility is no longer necessary or useful.65 Alternatively, SJWC contends that, once the Commission concludes that SJWC can sell the property, the property becomes no longer necessary or useful and § 790 applies.66
Discussion
As discussed above, the Application, Exhibits, Motion for Reconsideration and Brief on Legal Issues all conclusively confirm that the Main Office continues to be necessary and useful utility property, not only at the time of sale, but also for a period of time after the sale. SJWC seeks to sell property that is currently in rate base and generating a revenue requirement, is currently occupied and used to provide utility service, and will continue to be necessary and useful for providing utility service at, and after, the time of sale.
SJWC, itself, contends that the sale of the Main Office requires approval pursuant to § 851 because the property is still being used to provide utility services. At the same time, SJWC asks the Commission to designate the property to be no longer necessary or useful, and to authorize to reinvest 100% of the net proceeds from the sale in utility infrastructure pursuant to § 790. SJWC cannot have it both ways.
SJWC's request that the Commission make the determination that the Main Office facility is no longer necessary or useful is not the usual procedure that SJWC follows when designating utility property as no longer necessary or useful. According to SJWC, when it determines that a particular piece of utility property is no longer necessary or useful, it prepares a memorandum explaining why the property is no longer necessary or useful and submits the memorandum to the Vice President of Operations who makes the final determination that the utility property is no longer necessary or useful.67 Once SJWC determines that a piece of utility property is no longer necessary or useful, the property is transferred from utility plant in service to a non-operating account. There is no evidence that SJWC followed this procedure with respect to the Main Office. Instead, SJWC filed the Application, in part, to request that the Commission make the determination.
SJWC does not point to any decisions or other law to support its contention that, if the Commission authorizes SJWC to sell the property, the property becomes no longer necessary or useful, and § 790 applies. Commission approval to sell necessary or useful utility property does not change the need for, or the usefulness of, that property. In this instance, approval to sell the Main Office does not eliminate SJWC's need to house its corporate functions or to provide customers a walk in location to pay bills at that location until those functions are moved to the Replacement Facility.
Because SJWC will continue to use the Main Office for corporate functions and as a customer service center until and after it is sold, the Main Office continues to be necessary and useful even after SJWC receives authority to sell the facility. Commission approval only authorizes SJWC to sell the Main Office, but such approval does not render the Main Office unnecessary or useless.
As discussed above, the deficiencies of the Main Office make evident that it is inadequate for public utility service, but these deficiencies do not support a finding that the Main Office is no longer necessary or useful. Because the Proposed Transaction does not involve real property that is no longer necessary or useful, the proceeds from the sale of SJWC's Main Office are not eligible for reinvestment pursuant to § 790. Therefore, we deny SJWC's request for authorization to reinvest the net proceeds from the sale of its Main Office in infrastructure pursuant to § 790. This determination affirms the September 13 ACR.
The Gain on Sale Decision provides that utility ratepayers share in the gains or losses on the sale of water utility assets, except where the asset sold is real property that is no longer necessary or useful, in which case the proceeds shall be reinvested in accordance with § 790.68 The Proposed Transaction involves the sale of real property that is necessary and useful, and, therefore, the net proceeds from the sale of the Main Office should be allocated to ratepayers and shareholders pursuant to the Gain on Sale Decision.
The net proceeds from the sale of the Main Office are determined by subtracting from the sale price the book value of land and improvements, commissions, escrow and title fees, and taxes.
Table 1 Determination of the Net Proceeds from the Sale of the Main Office | |
Main Office sale price |
$ 4,000,000 |
Less: | |
Book value of land |
$ 30,318 |
Book value of structures and improvements (S&I) |
$ 1,242,957 |
Transaction costs/commissions (estimated) |
$ 137,200 |
Escrow/title fees (estimated) |
$ 15,360 |
Proceeds before taxes |
$ 2,574,165 |
Taxes @ 40.75% (estimated) |
$ 1,048,972 |
Net proceeds from the transaction |
$ 1,525,193 |
Source: SJWC-1, Jensen Tab, p. 3 | |
As shown in Table 1, the net proceeds from the sale of the Main Office are $1,525,193. The Percentage Allocation Rule provides that utility ratepayers receive 100% of gains on sale of depreciable utility assets and 67% of gains or losses on sale of non-depreciable utility assets.69 The utilities' shareholders receive the remaining 33% of gains or losses on sale of non-depreciable assets.70
To determine ratepayers' share of the net proceeds from the sale of the Main Office we first determine the portion of the net proceeds attributable to gains on depreciable assets so that 100% of that amount can be allocated to ratepayers. We then determine the portion of the net proceeds attributable to gains on non-depreciable assets so that amount can be allocated 67% to ratepayers and 33% to shareholders. Table 2 shows how the gain from the sale of the Main Office should be allocated between ratepayers and shareholders.
If the net proceeds are apportioned according to book values, Table 2 shows that non-depreciable land accounts for 2.4% of the gain to be split "67/33" between ratepayers and shareholders, and depreciable structures and improvements account for 97.6% of the gain that should be allocated 100% to ratepayers.
Table 2 Allocation of the Net Proceeds Between Ratepayers and Shareholders | |||
Depreciable/Non-depreciable Assets |
Land |
Structures and Improvements |
Total |
Asset Book Value71 |
$30,318 |
$1,242,957 |
$1,273,275 |
Book Value as Percent of Total |
2.4% |
97.6% |
100.0% |
Depreciable & Non-depreciable Gain (Net proceeds multiplied by book value percentage) |
$36,316 |
$1,488,877 |
$1,525,193 |
Percent of Gain Allocated to Ratepayers (from D.06-05-041, Ordering Paragraphs 1-3) |
67% |
100% |
|
Portion of Net Proceeds Allocated to Ratepayers |
$24,332 |
$1,488,877 |
$1,513,209 |
Portion of Net Proceeds Allocated to Shareholders |
$11,984 |
$0 |
$11,984 |
Total Net Proceeds |
$36,316 |
$1,488,877 |
$1,525,193 |
As shown in Table 2, the ratepayers' share of the gain on the sale of the Main Office is $1,513,209. This is an average of $7.03 per customer.72 The ratepayers' share of the gain should be distributed to SJWC's customers by applying a one-time surcredit, or a monthly surcredit to customer bills for a period not to exceed one year.
SJWC asserts that the PD's use of book value to determine the value of the net proceeds to be allocated to ratepayers and shareholders is unjustified, arbitrary, and unreasonable.73 SJWC contends that the value of the non-depreciable assets (i.e., the land at the Main Office) should be based on market value, as estimated in the two appraisals submitted into the record by SJWC. SJWC asserts that valuating the land according to book value is illogical, and that the PD offers no justification for doing so. SJWC's asserts that this results in shareholders receiving a smaller share of the net proceeds than they would otherwise receive if the land was valued according to market value.
D.06-05-041, as modified by D.06-12-043, states, "a utility receives a gain on sale when it sells an asset such as land, buildings or other tangible or intangible assets at a price higher than the acquisition cost of the non-depreciable asset or the depreciated book value of the depreciable asset..."74 For ratemaking purposes, the "book value" of land is the "acquisition cost" as used in D.06-05-041, as modified by D.06-12-043.
D.06-05-041, as modified by D.06-12-043, further states:
We reject an approach that allocates most (or all) of the gains on sale of land and other non-depreciable property to utility shareholders. The utilities' key argument in favor of a large shareholder allocation is that they only receive a rate of return on the original cost of land. Any appreciation in the value of the land, they claim, should therefore pass to shareholders.
The United States Supreme Court long ago held that ratemaking bodies need not give utility shareholders a rate of return based on the "present fair value" of utility property. Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591, 599-600 (1944).75 The Democratic Central Committee court explained the Hope Natural Gas holding as making it "clear that the utility is not entitled of right to have its rate base established at the value which the assets would command on the current market, although that market value exceeds original cost." Democratic Central Committee, 485 F.2d at 802.
D.06-05-041, as modified by D.06-12-043, requires gains to be allocated according to the percentage allocation default rule (100% depreciable and 67% - 33% non-depreciable) relating to gains on sale shall apply to water utility sale assets, except where the asset sold is real property that is no longer used and useful, and that the percentage allocation rule applies to routine asset sales where the sale price is $50 million or less and the after-tax gain or loss from the sale is $10 million or less76. Neither of those circumstances apply to this case. Therefore, SJWC's assertion that market value should be used to determine the net proceeds to be allocated to ratepayers and shareholders lacks merit.
65 Application, p. 9.
66 Brief on Legal Issues, p. 2.
67 TR 232:20-233:8.
68 D.06-05-041 (as modified by D.06-12-043), COL 24, OPs 1, 9, 20.
69 D.06-05-041, OP 1, as modified by D.06-12-043.
70 Depreciable assets include, but are not limited to, buildings, equipment, machinery, materials and vehicles, excluding routine retirements of minor utility assets that are no longer necessary or useful. Non-depreciable assets, but are not limited to, land, water rights and goodwill. D.06-05-041, OPs 2, 3 (as modified by D.06-12-043).
71 Exh. SJWC-1, Jensen, p. 3.
72 The per-customer share of the gain is derived by dividing the portion of net proceeds allocated to ratepayers ($1,507,035) by the total number of customers shown on Exh. SJWC-1, Jensen Attachment C.
73 SJWC's Opening Comments on Proposed Decision of ALJ Smith, pp. 3-5.
74 D.06-05-041 (as modified by D.06-12-043), p. 8. Emphasis added.
75 Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591, 599-600 (1944).
76 OP 4 and 20.
